Muni Bonds and Risk (VWIUX)

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Prahasaurus
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Muni Bonds and Risk (VWIUX)

Post by Prahasaurus »

I have invested heavily in Vanguard's Intermediate Tax-Exempt Fund, VWIUX, it's my primary bond fund (most of my bonds are in a taxable account). Thoughts about additional risks associated with this fund, in light of the coronavirus and massive strain this will put on federal and state coffers? I am not an optimist about the next 12-18 months, I think we are looking at very high unemployment and massive government assistance to working Americans so they can survive.

Any thoughts on how that will impact muni bonds, specifically Vanguard's fund listed in the title?

Thanks!
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Topic Author
Prahasaurus
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Re: Muni Bonds and Risk (VWIUX)

Post by Prahasaurus »

Any help here? I'm not worried about a fall in price, this is a long term holding. I'm worried about the viability of municipal bonds in light of what we see with the Coronavirus. If anything has fundamentally changed that could be worrisome...

Thanks!
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Irisheyes
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Re: Muni Bonds and Risk (VWIUX)

Post by Irisheyes »

16% of munis defaulted during the great depression.

Are we headed that way?

Who knows.
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Prahasaurus
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Re: Muni Bonds and Risk (VWIUX)

Post by Prahasaurus »

Irisheyes wrote: Wed Mar 18, 2020 12:32 pm 16% of munis defaulted during the great depression.

Are we headed that way?

Who knows.
That's actually not a terrible number for the Great Depression, to be honest.
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Irisheyes
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Re: Muni Bonds and Risk (VWIUX)

Post by Irisheyes »

Prahasaurus wrote: Wed Mar 18, 2020 12:54 pm
Irisheyes wrote: Wed Mar 18, 2020 12:32 pm 16% of munis defaulted during the great depression.

Are we headed that way?

Who knows.
That's actually not a terrible number for the Great Depression, to be honest.
Yes, I agree. Which is why I'm not selling (though I hold individual munis not a fund).
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kingsnake
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Re: Muni Bonds and Risk (VWIUX)

Post by kingsnake »

Most of my fixed income is in VWIUX, I plan to leave it there. Stay the course. Nobody knows what is going happen.
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bluquark
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Re: Muni Bonds and Risk (VWIUX)

Post by bluquark »

Like other A/AA rated funds from the corporate sector, VWIUX is down 5% from the peak, even though interest rates have decreased (which on its own should've increased the price by 5% or so). So increased credit risk appears to have already been priced in. It could drop somewhat further if the market is not pessimistic enough (that 16% from the Great Depression can be taken as a worst case, yes), and it also has a new potential upside of ~10% if the risk evaporates.
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virginiabirdie
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Re: Muni Bonds and Risk (VWIUX)

Post by virginiabirdie »

Wondering if anyone else has pared back exposure to VWIUX since this post went up. Or whether you've avoided buying it in general.
rennale
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Re: Muni Bonds and Risk (VWIUX)

Post by rennale »

Yes, I pared two years of living costs to cash from VWIUX in March, when things were looking particularly dire. Just to be extra cautious. I let the funds sit in cash for four months until I decided that I was being dumb and should simply stay the course. So I moved it back. And, of course, lost some money in the process. Fortunately I did stay the course with everything else so the loss has disappeared in the noise.
Tattarrattat
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Re: Muni Bonds and Risk (VWIUX)

Post by Tattarrattat »

Have all of taxable non-equity money in it, and have for years. Not worried.
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Re: Muni Bonds and Risk (VWIUX)

Post by AerialWombat »

I’ve added to my holdings of this fund monthly, as per my IPS.

These times are not different or special. Stay the course.
finite_difference
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Re: Muni Bonds and Risk (VWIUX)

Post by finite_difference »

rennale wrote: Sat Sep 05, 2020 8:44 am Yes, I pared two years of living costs to cash from VWIUX in March, when things were looking particularly dire. Just to be extra cautious. I let the funds sit in cash for four months until I decided that I was being dumb and should simply stay the course. So I moved it back. And, of course, lost some money in the process. Fortunately I did stay the course with everything else so the loss has disappeared in the noise.
VWIUX did have a ~10.5% liquidity crash from 14.88 on 3/8/2020 to 13.31 on 3/20/2020.

It was 14.85 on 8/10/2020 and it is now 14.72 on 9/4/2020.

These prices don’t include dividends.

I agree it was a bit scary, and the severe drop didn’t make sense to me.

But stayed the course and still like the idea of this fund.

If you held it since January to 9/4/2020 you’d have a real return of 2.64%. But that’s compared to 6.04% real return for Vanguard Total Bond Admiral. So Vanguard Total Bond is significantly outperforming VWIUX so far this year.
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Re: Muni Bonds and Risk (VWIUX)

Post by AerialWombat »

finite_difference wrote: Sat Sep 05, 2020 8:53 pm If you held it since January to 9/4/2020 you’d have a real return of 2.64%. But that’s compared to 6.04% real return for Vanguard Total Bond Admiral. So Vanguard Total Bond is significantly outperforming VWIUX so far this year.
Yeah, but then one must pay the taxes on the yield. Ewww, so gross. :mrgreen:
unbiased
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Re: Muni Bonds and Risk (VWIUX)

Post by unbiased »

Vanguard is fairly conservative -- only a little over 6% of its bonds are BBB, which is the rung on the credit ladder I would be most concerned about. For comparison, category average is 16%! What's more they are well overweight AAA and AA -- top tier. Advantage with Vanguard is that their rock bottom fees allows them to "play it safe" and still deliver a decent yield.

On a broader portfolio question though, only U.S. treasuries are reliably negatively correlated with stocks. Another crash and munis may not be the ballast you are looking for. I keep a small portion of my portfolio always in long-dated treasuries--despite interest rate risk--solely for this reason.
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Re: Muni Bonds and Risk (VWIUX)

Post by UpperNwGuy »

virginiabirdie wrote: Sat Sep 05, 2020 7:51 am Wondering if anyone else has pared back exposure to VWIUX since this post went up. Or whether you've avoided buying it in general.
Vanguard Intermediate-Term Tax-Exempt was my primary bond holding prior to the COVID-19 crisis. In mid-April, I dialed back my exposure from over 50% of my bond holdings to 33% of my bond holdings. I'm going to hold it at that percentage while I see how state and municipal finances survive the economic impact of COVID-19 over the next year or two. Overall, I think this has been one of Vanguard's best funds for several decades.
Notsobad
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Re: Muni Bonds and Risk (VWIUX)

Post by Notsobad »

I still have the majority of my bond holdings in VWIUX. I would not mind diversifying, but not sure that it is worth generating more taxable returns and I don’t want to fill all my Roth space with bonds.
typical.investor
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Re: Muni Bonds and Risk (VWIUX)

Post by typical.investor »

finite_difference wrote: Sat Sep 05, 2020 8:53 pm
rennale wrote: Sat Sep 05, 2020 8:44 am Yes, I pared two years of living costs to cash from VWIUX in March, when things were looking particularly dire. Just to be extra cautious. I let the funds sit in cash for four months until I decided that I was being dumb and should simply stay the course. So I moved it back. And, of course, lost some money in the process. Fortunately I did stay the course with everything else so the loss has disappeared in the noise.
VWIUX did have a ~10.5% liquidity crash from 14.88 on 3/8/2020 to 13.31 on 3/20/2020.

It was 14.85 on 8/10/2020 and it is now 14.72 on 9/4/2020.

These prices don’t include dividends.

I agree it was a bit scary, and the severe drop didn’t make sense to me.
It was a liquidity issue. Billions were pulled from the market and large funds had to de-lever.

Large players (Blackrock, Nuveen) with muni money market funds often deposit short term holdings into trusts as collateral to raise funds to invest long. So when money was withdrawn from money market funds en masse in the COVID panic, the collateral had to be liquidated to fund redemptions and longer dated holdings sold into an illiquid market and falling market which depressed pricing further.

https://www.bloomberg.com/news/articles ... d-by-havoc

https://seekingalpha.com/article/433400 ... leveraging

I have 33% of FI in munis and haven't changed my holdings.
Chris K Jones
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Re: Muni Bonds and Risk (VWIUX)

Post by Chris K Jones »

I didn't sell anything but now limit my allocation to Municipal bond funds to 25% of my fixed income. Otherwise intend to stay the course.
Last edited by Chris K Jones on Sun Sep 06, 2020 8:01 pm, edited 1 time in total.
skeptical
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Re: Muni Bonds and Risk (VWIUX)

Post by skeptical »

UpperNwGuy wrote: Sun Sep 06, 2020 6:54 pm
virginiabirdie wrote: Sat Sep 05, 2020 7:51 am Wondering if anyone else has pared back exposure to VWIUX since this post went up. Or whether you've avoided buying it in general.
Vanguard Intermediate-Term Tax-Exempt was my primary bond holding prior to the COVID-19 crisis. In mid-April, I dialed back my exposure from over 50% of my bond holdings to 33% of my bond holdings. I'm going to hold it at that percentage while I see how state and municipal finances survive the economic impact of COVID-19 over the next year or two. Overall, I think this has been one of Vanguard's best funds for several decades.
VWIUX was also my primary holding (80% of my bonds), rest in total bond in tax deferred.

In March, I sold all of it, moving 2/3 into VMLUX (similar fund, shorter term) and 1/3 into treasuries - mostly VFIRX (short term), some VFIUX (intermediate term)

Did this for several reasons:
- Concerns over state budgets and its effects on muni market
- Concerns over inflation
- Narrowing of yield differential between shorter and longer term

So, decreased my term from almost 6 years to about 2.5 years, and increased quality by moving some to treasuries. Also, muni's are closer in term to what the fed has shown they will bail out, not sure if this means anything.

I agree with UpperNwGuy, VWIUX has been a great fund. But I feel more comfortable with shorter duration, less default risk, and being better positioned for an increase in yields.

Willing to trade off less income and for now, and losing out if yields keep decreasing, and see where things are next summer.
finite_difference
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Re: Muni Bonds and Risk (VWIUX)

Post by finite_difference »

typical.investor wrote: Sun Sep 06, 2020 7:22 pm
finite_difference wrote: Sat Sep 05, 2020 8:53 pm
rennale wrote: Sat Sep 05, 2020 8:44 am Yes, I pared two years of living costs to cash from VWIUX in March, when things were looking particularly dire. Just to be extra cautious. I let the funds sit in cash for four months until I decided that I was being dumb and should simply stay the course. So I moved it back. And, of course, lost some money in the process. Fortunately I did stay the course with everything else so the loss has disappeared in the noise.
VWIUX did have a ~10.5% liquidity crash from 14.88 on 3/8/2020 to 13.31 on 3/20/2020.

It was 14.85 on 8/10/2020 and it is now 14.72 on 9/4/2020.

These prices don’t include dividends.

I agree it was a bit scary, and the severe drop didn’t make sense to me.
It was a liquidity issue. Billions were pulled from the market and large funds had to de-lever.

Large players (Blackrock, Nuveen) with muni money market funds often deposit short term holdings into trusts as collateral to raise funds to invest long. So when money was withdrawn from money market funds en masse in the COVID panic, the collateral had to be liquidated to fund redemptions and longer dated holdings sold into an illiquid market and falling market which depressed pricing further.

https://www.bloomberg.com/news/articles ... d-by-havoc

https://seekingalpha.com/article/433400 ... leveraging

I have 33% of FI in munis and haven't changed my holdings.
Thanks! Yeah seems like those institutional investors caused the crash. It also seems partly because the Fed was slow to step in.

If I recall correctly, TIPS had a liquidity issue as well during the Great Recession.

Maybe the Fed needs to do a better job keeping munis liquid.

Is there any way to know what bond funds are vulnerable to liquidity issues? Vanguard Total Bond should be very liquid?
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virginiabirdie
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Re: Muni Bonds and Risk (VWIUX)

Post by virginiabirdie »

skeptical wrote: Sun Sep 06, 2020 7:29 pm
UpperNwGuy wrote: Sun Sep 06, 2020 6:54 pm
virginiabirdie wrote: Sat Sep 05, 2020 7:51 am Wondering if anyone else has pared back exposure to VWIUX since this post went up. Or whether you've avoided buying it in general.
Vanguard Intermediate-Term Tax-Exempt was my primary bond holding prior to the COVID-19 crisis. In mid-April, I dialed back my exposure from over 50% of my bond holdings to 33% of my bond holdings. I'm going to hold it at that percentage while I see how state and municipal finances survive the economic impact of COVID-19 over the next year or two. Overall, I think this has been one of Vanguard's best funds for several decades.
VWIUX was also my primary holding (80% of my bonds), rest in total bond in tax deferred.

In March, I sold all of it, moving 2/3 into VMLUX (similar fund, shorter term) and 1/3 into treasuries - mostly VFIRX (short term), some VFIUX (intermediate term)

Did this for several reasons:
- Concerns over state budgets and its effects on muni market
- Concerns over inflation
- Narrowing of yield differential between shorter and longer term

So, decreased my term from almost 6 years to about 2.5 years, and increased quality by moving some to treasuries. Also, muni's are closer in term to what the fed has shown they will bail out, not sure if this means anything.

I agree with UpperNwGuy, VWIUX has been a great fund. But I feel more comfortable with shorter duration, less default risk, and being better positioned for an increase in yields.

Willing to trade off less income and for now, and losing out if yields keep decreasing, and see where things are next summer.
VWSUX seems to be a popular place to stash short-term cash on this board. It's hold Short term muni funds. https://investor.vanguard.com/mutual-fu ... view/vwsux

Is this also an area people are concerned about. Or is the fact that it's short term make it less of a concern. (As you can probably tell, I don't know much about bonds!)
darrvao777
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Re: Muni Bonds and Risk (VWIUX)

Post by darrvao777 »

1/3 of my portfolio is vwiux, still plowing in money with each paycheck
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Re: Muni Bonds and Risk (VWIUX)

Post by hudson »

Prahasaurus wrote: Wed Mar 18, 2020 3:45 am I have invested heavily in Vanguard's Intermediate Tax-Exempt Fund, VWIUX, it's my primary bond fund (most of my bonds are in a taxable account). Thoughts about additional risks associated with this fund, in light of the coronavirus and massive strain this will put on federal and state coffers? I am not an optimist about the next 12-18 months, I think we are looking at very high unemployment and massive government assistance to working Americans so they can survive.

Any thoughts on how that will impact muni bonds, specifically Vanguard's fund listed in the title?

Thanks!
I think that VWIUX is OK. It's 10% of my holdings and I plan to keep it.
It's mostly AAA/AA/A munis. Therefore the fund has safer holdings than your ordinary muni fund.
AAA/AA bonds lost less than 1% during the great depression.

If you want a safer muni fund, look at Baird's intermediate muni BMBIX. It was all AAA/AA/prefunded the last time I looked.

Muni defaults aren't as easy as corporate defaults. The standards are higher before a government can issue bonds. When there is a default, the bondholders many times get everything back or a large percentage. Governments don't want low bond ratings because it costs too much.

I know the above doesn't answer your question; that would take guessing about the future. Your guess is as good as mine.
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Re: Muni Bonds and Risk (VWIUX)

Post by Oak&Elm »

I actually just sold all my VWIUX last week, I was up about 6-7% and since I'm in the 22% tax bracket I really had no good reason to hold muni's. My employer bond offerings were just ok that's why I justified holding VWIUX, great fund for high earners.
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Re: Muni Bonds and Risk (VWIUX)

Post by hudson »

Oak&Elm wrote: Mon Sep 07, 2020 3:43 pm I actually just sold all my VWIUX last week, I was up about 6-7% and since I'm in the 22% tax bracket I really had no good reason to hold muni's. My employer bond offerings were just ok that's why I justified holding VWIUX, great fund for high earners.
You can still come out ahead with VWIUX in the 22% tax bracket. Compare the after tax payouts of VWIUX to other comparable investments.
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Re: Muni Bonds and Risk (VWIUX)

Post by Oak&Elm »

hudson wrote: Mon Sep 07, 2020 3:52 pm
Oak&Elm wrote: Mon Sep 07, 2020 3:43 pm I actually just sold all my VWIUX last week, I was up about 6-7% and since I'm in the 22% tax bracket I really had no good reason to hold muni's. My employer bond offerings were just ok that's why I justified holding VWIUX, great fund for high earners.
You can still come out ahead with VWIUX in the 22% tax bracket. Compare the after tax payouts of VWIUX to other comparable investments.
I have noticed the muni funds have been equal or better than total bond, just seemed like a good time to take gains and hopefully lower my risk a bit.
BlackcatCA
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Re: Muni Bonds and Risk (VWIUX)

Post by BlackcatCA »

Is it true that muni bonds are actually less risky than in March because of the Fed purchase program?
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Re: Muni Bonds and Risk (VWIUX)

Post by abuss368 »

finite_difference wrote: Sun Sep 06, 2020 7:51 pm
If I recall correctly, TIPS had a liquidity issue as well during the Great Recession.
Correct. I believe the collapse of Lehman Brothers contributed to the lack of liquidity of TIPS at that time.
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Re: Muni Bonds and Risk (VWIUX)

Post by abuss368 »

I have stayed invested with Vanguard Intermediate Term Tax Exempt for a long time. Every now and then a muni crisis is projected or makes the news and the fund drops a little. Each time the fund continues along and keeps paying dividends.

I have tuned out the occasional noise and stayed the course. Total Bond is in our tax advantaged accounts.
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Re: Muni Bonds and Risk (VWIUX)

Post by unbiased »

finite_difference wrote: Sat Sep 05, 2020 8:53 pm
Thanks! Yeah seems like those institutional investors caused the crash. It also seems partly because the Fed was slow to step in.

If I recall correctly, TIPS had a liquidity issue as well during the Great Recession.

Maybe the Fed needs to do a better job keeping munis liquid.

Is there any way to know what bond funds are vulnerable to liquidity issues? Vanguard Total Bond should be very liquid?
No. What March showed the world--and I'm glad people are still bringing it up here--is that a liquidity crisis is the most devastating of market risks. Absolutely nothing is safe in a liquidity crisis--except cash. In the worst case, only cash under the mattress.
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